FAANG trade faltering
According to the Bank of America Merrill Lynch Survey for November, the so-called FAANG and BAT stocks—the US stocks Facebook (FB), Apple (AAPL), Amazon (AMZN), Netflix (NFLX), and Google (GOOGL) and China’s Baidu (BIDU), Alibaba (BABA), and Tencent (TCEHY)—remained the most crowded trade for the tenth consecutive month. However, investors’ sentiment seems to be shifting, as only 29% of the respondents determined them to be the most crowded trades as compared to 32% last month and 36% a month before that. Also, allocations to the tech sector (XLK) dropped to the lowest level since February 2009 with only 18% of investors overweight in the sector.
Tech leading the declines
Tech stocks (QQQ) led the declines in October. The headwinds for these stocks are increasing with rising costs and increased regulatory scrutiny. Investors’ stretched valuation concerns have been especially acute in the US tech space (XLK), meaning that tech stocks are much more vulnerable to higher interest rates. Another investor worry that is particularly acute for tech stocks is the potential impact of the US-China trade war. These companies are much more exposed to China and could face a harder tariff pinch. China (FXI) is the global manufacturing hub of semiconductor (SMH) and consumer electronics.
Risk-off environment and precious metals
Extreme market positioning has led to steep declines in these stocks on the emergence of a negative catalyst. As the risk-off sentiment takes hold in the market, investors could rotate out of more growth-oriented and expensive stocks and into relatively stable defensive stocks. Holding gold (GLD) and other precious metals is another way of diversifying risk in such a volatile environment.